Shoppers look for school supplies at a store, Wednesday, July 27, 2022, in South Miami, Fla. Economists are saying strong consumer demand, spurred by rising wages, is fueling inflation. (AP Photo/Marta Lavandier, File) (AP Photo/Marta Lavandier, File / AP Images)
For people who have home equity lines of credit or other variable-interest debt, rates will increase by roughly the same amount as the Fed hike, usually within one or two billing cycles. That’s because those rates are based in part on banks’ prime rate, which follows the Fed’s.
WHAT IF I WANT TO BUY A CAR?
Auto loans are at their highest levels since 2012, according to Bankrate.com’s Greg McBride. Rates on new auto loans are likely to go up by nearly as much as the Fed's rate increase. That could knock some lower-income buyers out of the new-vehicle market, said Jessica Caldwell, executive director at Edmunds.com.
Caldwell added that the entire increase isn’t passed on to consumers; some automakers are subsidizing rates to attract buyers. Bankrate.com says a 60-month new vehicle loan averaged just over 5% last week, up from 3.86% in January. A 48-month used vehicle loan was 5.6%, up from 4.4% in January.
Many lower-income buyers have already been priced out of the new-vehicle market, according to Caldwell. Automakers have been able to get top dollar for their vehicles because demand is high and supply is low. For more than a year, the industry has been grappling with a shortage of computer chips that has slowed factories worldwide.
HOW ARE SAVERS AFFECTED?
The rising returns on high-yield savings accounts and certificates of deposit (CDs) have put them at levels not seen since 2009, which means households may want to boost savings wherever possible. You can also now earn more on bonds and other fixed-income investments.
Though savings, CDs, and money market accounts don’t typically track the Fed’s changes, online banks and others that offer high-yield savings accounts can be exceptions. These institutions typically compete aggressively for depositors. (The catch: They sometimes require significantly high deposits.)
In general, banks tend to capitalize on a higher-rate environment to boost their profits by imposing higher rates on borrowers, without necessarily offering juicer rates to savers.
WILL THIS AFFECT RENTS? HOME OWNERSHIP?
Last week, the average fixed mortgage rate topped 6%, its highest point in 14 years, meaning that rates on home loans are about twice as expensive as they were a year ago.
Mortgage rates don't always move perfectly in tandem with the Fed increase, instead tracking the expected yield on the 10-year Treasury note. The yield on the 10-year Treasury note has reached nearly 3.6%, its highest level since 2011.
Asking rents are up 11% from last year, said Daryl Fairweather, an economist with the brokerage Redfin. But price growth has slowed, and some renters are moving to more affordable areas.
WILL IT BE EASIER TO FIND A HOUSE IF I'M STILL LOOKING TO BUY?
If you’re financially able to proceed with a home purchase, you’re likely to have more options than at any time in the past year. Sales of both new and existing homes have dropped steadily for months.
HOW HAVE THE RATE HIKES INFLUENCED CRYPTO?
Cryptocurrencies like bitcoin have dropped in value since the Fed began raising rates. So have many previously high-valued technology stocks. Bitcoin has plunged from a peak of about $68,000 to under $20,000.
Higher rates mean that safe assets like Treasuries have become more attractive to investors because their yields have increased. That makes risky assets like technology stocks and cryptocurrencies less attractive, in turn.
Still, bitcoin continues to suffer from problems separate from economic policy. Two major crypto firms have failed, shaking the confidence of crypto investors.
WHAT’S PROMPTING THE RATE INCREASES?
The short answer: Inflation. Over the past year, inflation has clocked in at a painful 8.3%. So-called core prices, which exclude food and energy, also rose faster than expected.
Fed Chair Jerome Powell warned last month that, "our responsibility to deliver price stability is unconditional" — a remark widely interpreted to mean the Fed will fight inflation with rate increases even if it leads to deep job losses or a recession.
The goal is to slow consumer spending, thereby reducing demand for homes, cars and other goods and services, eventually cooling the economy and lowering prices.
Powell acknowledged that aggressively raising interest rates would "bring some pain."
WHAT ABOUT MY JOB?
Some economists argue that widespread layoffs will be necessary to slow rising prices. One argument is that a tight labor market is fueling wage growth and higher inflation. In August, the economy gained 315,000 jobs. There are roughly two job openings advertised for every unemployed worker.
"Job openings continue to exceed job hires, indicating employers are still struggling to fill vacancies," noted Odeta Kushi, an economist with First American.
As a result, some argue higher unemployment might cool wage pressures and tame inflation. Research published earlier this month by the Brookings Institution stated that unemployment might have to go as high as 7.5% to reduce inflation to the Fed’s 2% target.
WILL THIS AFFECT STUDENT LOANS?
Borrowers who take out new private student loans should prepare to pay more as as rates increase. The current range for federal loans is between about 5% and 7.5%.
That said, payments on federal student loans are suspended with zero interest until Dec. 31 as part of an emergency measure put in place early in the pandemic. President Joe Biden has also announced some loan forgiveness, of up to $10,000 for most borrowers, and up to $20,000 for Pell Grant recipients.
Federal Reserve Chairman Jerome Powell speaks during a news conference at the Federal Reserve Board building in Washington, Wednesday, July 27, 2022. (AP Photo/Manuel Balce Ceneta) (AP Photo/Manuel Balce Ceneta / AP Images) BILLIONAIRE DAVID RUBENSTEIN WARNS INFLATION WILL BE 'DIFFICULT' FOR THE FED TO REDUCE
IS THERE A CHANCE THE RATE HIKES WILL BE REVERSED?
Stock prices rose in August based on hopes that the Fed would reverse course. But it looks increasingly unlikely that rates will come down anytime soon. Economists expect Fed officials to forecast that the key rate could reach 4% by the end of this year. They’re also likely to signal additional increases in 2023, even to 4.5%.
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WILL THERE BE A RECESSION?
Short-term rates at these levels will make a recession likelier by increasing the cost of mortgages, car loans, and business loans. While the Fed hopes that higher borrowing costs will slow growth by cooling the hot job market and capping wage growth, the risk is that the Fed could weaken the economy, causing a recession that would produce significant job losses.
AP Business Writers Christopher Rugaber in Washington, Tom Krisher in Detroit and Damian Troise and Ken Sweet in New York contributed to this report.
The Associated Press receives support from Charles Schwab Foundation for educational and explanatory reporting to improve financial literacy. The independent foundation is separate from Charles Schwab and Co. Inc. The AP is solely responsible for its journalism."
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